H. Rept. 114-597 - PRESERVING ACCESS TO CRE CAPITAL ACT OF 2016114th Congress (2015-2016)
Committee Report
| Report Type: | House Report |
|---|---|
| Accompanies: | H.R.4620 |
| Committees: |
H. Rept. 114-597 - 114th Congress (2015-2016)
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House Report 114-597 - PRESERVING ACCESS TO CRE CAPITAL ACT OF 2016
[House Report 114-597]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-597
======================================================================
PRESERVING ACCESS TO CRE CAPITAL ACT OF 2016
_______
May 26, 2016.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4620]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4620) to amend the Securities Exchange Act of
1934 to exempt certain commercial real estate loans from risk
retention requirements, and for other purposes, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
Purpose and Summary
Introduced by Representative French Hill on February 25,
2016, H.R. 4620, the Preserving Access to CRE Capital Act of
2016, amends the risk retention requirements mandated by
Section 941 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) for certain ``qualified''
commercial real estate loans. The bill also provides modest
relief for one sector of commercial mortgage-backed securities
knowns as the Single Asset Single Borrower (``SASB'') Market.
Applying risk retention requirements mandated by the Dodd-Frank
Act to commercial real estate securitizations adds costs to the
security borne by borrowers, which in turn stifles economic
growth and reduces investor interest in the commercial real
estate market.
Background and Need for Legislation
As noted by the testimony of the representative of the
Commercial Real Estate Finance Council (``CREFC'') at the
Capital Markets and Government Sponsored Enterprises
Subcommittee hearing to examine H.R. 4620, securitization ``is
one of the essential processes for the delivery of capital
necessary for the health of commercial real estate markets and
broader macro-economic growth.'' Section 941 of the Dodd-Frank
Act is premised on a view that by requiring securitizers to
retain some credit risk or--``skin in the game''--and forcing
them to bear losses if a borrower defaults, securitizers will
better monitor the quality of loans that are bundled into the
pool.
The purpose of risk retention is to protect investors
buying conduit securitizations with dozens of assets in a pool
in cases where it is difficult to analyze the underlying
assets. However, the concern that the underlying assets are too
complicated to analyze is not an issue for securities in the
SASB Market. A SASB securitization consists of a single, large
mortgage on one asset (such as a mall). Usually, a single
lender does not finance these large developments, which is why
it is more efficient to use commercial mortgage-backed security
(CMBS) financing through the public capital markets. Investors
generally are attracted to SASB securitizations because they
are easy to understand and underwrite and perform well.
Applying the Dodd-Frank Act's risk retention requirements to
SASB securities adds increased costs to borrowers, reduces
returns to investors, and could hamper competition in the
financing market due to increased and burdensome compliance
costs. H.R. 4620 provides modest regulatory relief by exempting
SASB securities from the Dodd-Frank Act's risk retention
requirements.
It is important to provide relief to SASB securities
because the single-asset CMBS market is the only natural,
holistic funding source for commercial properties. At the end
of 2015, the Federal Reserve and Office of the Comptroller of
the Currency published a bulletin warning regulated
institutions against over-exposure to commercial real estate--
suggesting that commercial bank lending will not be a
substitute funding source for such properties and that banks
will in all likelihood reduce their lending in the commercial
space. This reduction in lending will reduce market capacity
because banks are currently the largest lenders to commercial
assets; CMBS is second. If the CMBS market becomes stagnant
because of the risk retention requirements, bond prices will
decrease, which will harm borrowers and investors. Current
investors will be forced to write down the value of their
holdings; market illiquidity could have a contagion effect on
the primary lending markets, which would further increase loan
rates and drive demand to insurance companies and other
regulated entities that do not have sufficient capital to meet
market needs. Should this occur, it will affect the prices of
the underlying assets--the real estate itself. The market has
witnessed the effects of a precipitous drop in real estate
prices through many cycles; such drops usually do not benefit
investors, owners, or taxpayers. Simply put, applying the Dodd-
Frank Act's risk retention mandate to the SASB market is
inappropriate, misguided, and will harm market participants,
including investors.
Overall, the CMBS market is losing institutional capacity.
Banks and mortgage originators are leaving the market or
substantially reducing their exposure to it. Once industry
capacity is lost, it takes a long time before this capacity can
be regenerated. A significant driver of this deterioration in
the CMBS market is burdensome regulation. While the overall
intent of the regulations is well-founded, the overwhelming
burden of rules not appropriately tailored to the
characteristics of different asset classes provides little
marginal prudential improvement, if at all. At the same time,
these rules generate significant costs to the end users (i.e.,
borrowers and consumers) and to savers whose investments are
devalued as a result. Consequently, industry participants of
all types have expressed concerns that regulation is
institutionalizing inefficiencies, and could even severely
disable the CMBS market. As the CREFC representative testified
before the Capital Markets Subcommittee, ``lenders and
investors agree that a dislocation in CMBS will travel quickly
throughout the commercial real estate debt and equity markets,
impacting valuations and fundamentals and potentially inciting
a negative feedback loop throughout the sector by depressing
values and increasing defaults.''
Risk retention regulatory relief for qualified CMBS loans
H.R. 4620 provides limited relief for qualified CMBS loans.
Under current law, only a small percentage of CMBS loans are
considered qualified commercial real estate (QCRE) loans and
therefore exempt from risk retention requirements.
Inexplicably, regulators used different factors for determining
qualified residential mortgage-backed securities as compared to
qualified commercial real estate mortgage-backed securities.
More than 85% of today's residential mortgage-backed securities
(RMBS) loans would qualify for an exemption from risk
retention; however, in the CMBS market, only 3-8% of all CMBS
loans would qualify. The current inconsistent treatment of
qualified commercial versus residential mortgage-based
securities defies logical explanation, given that failed
housing policies precipitated the financial crisis.
Accordingly, H.R. 4620 affords similar and appropriate
treatment to qualified CMBS loans.
Representative Hill's legislation restores the proper
balance between risk retention and a healthy, functioning CMBS
market for borrowers and employers across the United States.
Specifically, H.R. 4620: (1) exempts SASB securities from the
Dodd-Frank Act's risk retention requirements; (2) sets
reasonable parameters for regulating and designating certain
high-quality commercial loans as ``qualified'' and therefore
exempt from the risk retention rules; and (3) provides
flexibility to suit investors by making risk retention
requirements applicable to third party purchasers of commercial
real estate loans less onerous.
Required rulemaking
The Committee believes that regulators had the authority to
limit the application of the Dodd-Frank Act's risk retention
requirements to commercial mortgages because of the inclusion
of language within Section 941(b), which added Section 15G to
the Securities Exchange Act of 1934. The regulators' decision
not to exercise this authority necessitated H.R. 4620, which
requires the issuance of one joint rule by the prudential
regulators and the Securities and Exchange Commission to
provide relief for a subset of commercial mortgages known as
the ``qualified'' commercial real estate loan.
Hearings
The Committee on Financial Services' Subcommittee on
Capital Markets and Government Sponsored Enterprises held a
hearing examining matters relating to H.R. 4620 on February 24,
2016.
Committee Consideration
The Committee on Financial Services met in open session on
March 2, 2016, and ordered H.R. 4620 to be reported favorably
to the House without amendment by a recorded vote of 39 yeas to
18 nays (recorded vote no. FC-101), a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole record vote in Committee was a motion by Chairman
Hensarling to report the bill favorably to the House without
amendment. That motion was agreed to by a recorded vote of 39
yeas to 18 nays (Record vote no. FC-101), a quorum being
present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4620
will reduce costs to borrowers, increase returns to investors,
and increase competition amongst credit providers by modifying
the Dodd-Frank Act's risk retention requirements for certain
commercial real estate loans and by providing modest relief for
the Single Asset Single Borrower (SASB) market.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, May 23, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4620, the
Preserving Access to CRE Capital Act of 2016.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall.
Enclosure.
H.R. 4620--Preserving Access to CRE Capital Act of 2016
Under current law, issuers of securities that are backed by
a pool of financial assets must retain an economic interest in
the assets underlying the securities that they issue, a feature
known as risk retention. H.R. 4620 would exempt from that
requirement a class of securities related to commercial real
estate if the securitized mortgage is backed by a loan, or
group of loans, on commercial properties under common ownership
or control. (Such securities are known as the Single Asset
Single Borrower security class.) H.R. 4620 also would exempt
some qualified commercial real estate loans from the risk-
retention requirement. Finally, H.R. 4620 would change the
requirements regarding who may purchase residual risk from an
issuer and how it is retained.
The bill would direct the federal banking agencies--the
Federal Reserve, Office of the Comptroller of the Currency
(OCC), and the Federal Deposit Insurance Corporation (FDIC)--
and the Securities and Exchange Commission (SEC) to issue the
standards required to qualify for the exemption and those
agencies would need to revise current regulations concerning
exemptions to risk-retention requirements.
Based on information from those four agencies, CBO
estimates that the costs of revising the regulations would not
be significant. The SEC is authorized to collect fees
sufficient to offset its annual appropriation; therefore, CBO
estimates that the net effect on discretionary spending would
be negligible, assuming appropriations actions consistent with
that authority.
Costs incurred by the FDIC and the OCC are recorded in the
budget as increases in direct spending. Those two agencies are
authorized to collect premiums and fees from insured depository
institutions to cover administrative expenses. CBO expects that
they would do so to recover any costs associated with amending
current regulations under the bill. Costs to the Federal
Reserve System are reflected on the federal budget as a
reduction in remittances to the Treasury (which are recorded in
the budget as revenues). Because enacting H.R. 4620 would
affect direct spending and revenues, pay-as-you-go procedures
apply. However, CBO estimates that the net effects would be
insignificant for each year. CBO estimates that enacting H.R.
4620 would not increase net direct spending or on-budget
deficits in any of the four consecutive 10-year periods
beginning in 2027.
H.R. 4620 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA) and would not affect
the budgets of state, local, or tribal governments.
If the SEC, FDIC, or OCC increase fees to offset the costs
of implementing the bill, H.R 4620 would increase the cost of
an existing mandate on private entities required to pay those
fees. Based on information from the affected agencies, CBO
estimates that the incremental cost of the mandate, if imposed,
would be minimal and would fall well below the annual threshold
for private-sector mandates established in UMRA ($154 million
in 2016, adjusted annually for inflation).
The CBO staff contact for this estimate is Stephen Rabent.
The estimate was approved by H. Samuel Papenfuss, Deputy
Assistance Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
H.R. 4620 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
Duplication of Federal Programs
Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015),
the Committee states that no provision of H.R. 4620 establishes
or reauthorizes a program of the Federal Government known to be
duplicative of another Federal program, a program that was
included in any report from the Government Accountability
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most
recent Catalog of Federal Domestic Assistance.
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015),
the Committee states that H.R. 4620 contains one directed
rulemaking.
Section-by-Section Analysis of the Legislation
Section 1: Short title
This section cites H.R. 4620 as the ``Preserving Access to
CRE Capital Act of 2016''.
Section 2: Exemption for certain commercial real estate loans from risk
retention requirements
This section amends Section 15G of the Securities Exchange
Act of 1934 to exempt single loan commercial real estate
securities from the risk retention requirements mandated by the
Act. In addition, this section exempts qualified commercial
real estate loans from the risk retention requirements, and
directs the federal regulators to consider specific standards
when adopting the qualified commercial real estate loan
exemption. This section also provides flexibility to structure
the retained interest to third-party purchases of Commercial
Mortgage Backed Securities (CMBS).
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
* * * * * * *
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
SEC. 15G. CREDIT RISK RETENTION.
(a) Definitions.--In this section--
(1) the term ``Federal banking agencies'' means the
Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, and the
Federal Deposit Insurance Corporation;
(2) the term ``insured depository institution'' has
the same meaning as in section 3(c) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(c));
(3) the term ``securitizer'' means--
(A) an issuer of an asset-backed security; or
(B) a person who organizes and initiates an
asset-backed securities transaction by selling
or transferring assets, either directly or
indirectly, including through an affiliate, to
the issuer; and
(4) the term ``originator'' means a person who--
(A) through the extension of credit or
otherwise, creates a financial asset that
collateralizes an asset-backed security; and
(B) sells an asset directly or indirectly to
a securitizer.
(b) Regulations Required.--
(1) In general.--Not later than 270 days after the
date of enactment of this section, the Federal banking
agencies and the Commission shall jointly prescribe
regulations to require any securitizer to retain an
economic interest in a portion of the credit risk for
any asset that the securitizer, through the issuance of
an asset-backed security, transfers, sells, or conveys
to a third party.
(2) Residential mortgages.--Not later than 270 days
after the date of the enactment of this section, the
Federal banking agencies, the Commission, the Secretary
of Housing and Urban Development, and the Federal
Housing Finance Agency, shall jointly prescribe
regulations to require any securitizer to retain an
economic interest in a portion of the credit risk for
any residential mortgage asset that the securitizer,
through the issuance of an asset-backed security,
transfers, sells, or conveys to a third party.
(c) Standards for Regulations.--
(1) Standards.--The regulations prescribed under
subsection (b) shall--
(A) prohibit a securitizer from directly or
indirectly hedging or otherwise transferring
the credit risk that the securitizer is
required to retain with respect to an asset;
(B) require a securitizer to retain--
(i) not less than 5 percent of the
credit risk for any asset--
(I) that is not a qualified
residential mortgage that is
transferred, sold, or conveyed
through the issuance of an
asset-backed security by the
securitizer; or
(II) that is a qualified
residential mortgage that is
transferred, sold, or conveyed
through the issuance of an
asset-backed security by the
securitizer, if 1 or more of
the assets that collateralize
the asset-backed security are
not qualified residential
mortgages; or
(ii) less than 5 percent of the
credit risk for an asset that is not a
qualified residential mortgage that is
transferred, sold, or conveyed through
the issuance of an asset-backed
security by the securitizer, if the
originator of the asset meets the
underwriting standards prescribed under
paragraph (2)(B);
(C) specify--
(i) the permissible forms of risk
retention for purposes of this section;
(ii) the minimum duration of the risk
retention required under this section;
and
(iii) that a securitizer is not
required to retain any part of the
credit risk for an asset that is
transferred, sold or conveyed through
the issuance of an asset-backed
security by the securitizer, if all of
the assets that collateralize the
asset-backed security are qualified
residential mortgages;
(D) apply, regardless of whether the
securitizer is an insured depository
institution;
(E) with respect to a commercial mortgage,
specify the permissible types, forms, and
amounts of risk retention that would meet the
requirements of subparagraph (B), which in the
determination of the Federal banking agencies
and the Commission may include--
(i) retention of a specified amount
or percentage of the total credit risk
of the asset;
(ii) [retention of the first-loss
position by a third-party purchaser
that] retention of the first-loss
position by a one or two party third-
party purchaser, who may hold the
retention obligation in either a
senior-subordinate structure or pari
passu, provided that each specifically
negotiates for the purchase of such
first loss position, holds adequate
financial resources to back losses,
provides due diligence on all
individual assets in the pool before
the issuance of the asset-backed
securities, and meets the same
standards for risk retention as the
Federal banking agencies and the
Commission require of the securitizer;
(iii) a determination by the Federal
banking agencies and the Commission
that the underwriting standards and
controls for the asset are adequate;
and
(iv) provision of adequate
representations and warranties and
related enforcement mechanisms; and
(F) establish appropriate standards for
retention of an economic interest with respect
to collateralized debt obligations, securities
collateralized by collateralized debt
obligations, and similar instruments
collateralized by other asset-backed
securities; and
(G) provide for--
(i) a total or partial exemption of
any securitization, as may be
appropriate in the public interest and
for the protection of investors;
(ii) a total or partial exemption for
the securitization of an asset issued
or guaranteed by the United States, or
an agency of the United States, as the
Federal banking agencies and the
Commission jointly determine
appropriate in the public interest and
for the protection of investors, except
that, for purposes of this clause, the
Federal National Mortgage Association
and the Federal Home Loan Mortgage
Corporation are not agencies of the
United States;
(iii) a total or partial exemption
for any asset-backed security that is a
security issued or guaranteed by any
State of the United States, or by any
political subdivision of a State or
territory, or by any public
instrumentality of a State or territory
that is exempt from the registration
requirements of the Securities Act of
1933 by reason of section 3(a)(2) of
that Act (15 U.S.C. 77c(a)(2)), or a
security defined as a qualified
scholarship funding bond in section
150(d)(2) of the Internal Revenue Code
of 1986, as may be appropriate in the
public interest and for the protection
of investors; and
(iv) the allocation of risk retention
obligations between a securitizer and
an originator in the case of a
securitizer that purchases assets from
an originator, as the Federal banking
agencies and the Commission jointly
determine appropriate.
(2) Asset classes.--
(A) Asset classes.--The regulations
prescribed under subsection (b) shall establish
asset classes with separate rules for
securitizers of different classes of assets,
including residential mortgages, commercial
mortgages, commercial loans, auto loans, and
any other class of assets that the Federal
banking agencies and the Commission deem
appropriate.
(B) Contents.--For each asset class
established under subparagraph (A), the
regulations prescribed under subsection (b)
shall include underwriting standards
established by the Federal banking agencies
that specify the terms, conditions, and
characteristics of a loan within the asset
class that indicate a low credit risk with
respect to the loan.
(d) Originators.--In determining how to allocate risk
retention obligations between a securitizer and an originator
under subsection (c)(1)(E)(iv), the Federal banking agencies
and the Commission shall--
(1) reduce the percentage of risk retention
obligations required of the securitizer by the
percentage of risk retention obligations required of
the originator; and
(2) consider--
(A) whether the assets sold to the
securitizer have terms, conditions, and
characteristics that reflect low credit risk;
(B) whether the form or volume of
transactions in securitization markets creates
incentives for imprudent origination of the
type of loan or asset to be sold to the
securitizer; and
(C) the potential impact of the risk
retention obligations on the access of
consumers and businesses to credit on
reasonable terms, which may not include the
transfer of credit risk to a third party.
(e) Exemptions, Exceptions, and Adjustments.--
(1) In general.--The Federal banking agencies and the
Commission may jointly adopt or issue exemptions,
exceptions, or adjustments to the rules issued under
this section, including exemptions, exceptions, or
adjustments for classes of institutions or assets
relating to the risk retention requirement and the
prohibition on hedging under subsection (c)(1).
(2) Applicable standards.--Any exemption, exception,
or adjustment adopted or issued by the Federal banking
agencies and the Commission under this paragraph
shall--
(A) help ensure high quality underwriting
standards for the securitizers and originators
of assets that are securitized or available for
securitization; and
(B) encourage appropriate risk management
practices by the securitizers and originators
of assets, improve the access of consumers and
businesses to credit on reasonable terms, or
otherwise be in the public interest and for the
protection of investors.
(3) Certain institutions and programs exempt.--
(A) Farm credit system institutions.--
Notwithstanding any other provision of this
section, the requirements of this section shall
not apply to any loan or other financial asset
made, insured, guaranteed, or purchased by any
institution that is subject to the supervision
of the Farm Credit Administration, including
the Federal Agricultural Mortgage Corporation.
(B) Other federal programs.--This section
shall not apply to any residential,
multifamily, or health care facility mortgage
loan asset, or securitization based directly or
indirectly on such an asset, which is insured
or guaranteed by the United States or an agency
of the United States. For purposes of this
subsection, the Federal National Mortgage
Association, the Federal Home Loan Mortgage
Corporation, and the Federal home loan banks
shall not be considered an agency of the United
States.
(4) Exemption for qualified residential mortgages.--
(A) In general.--The Federal banking
agencies, the Commission, the Secretary of
Housing and Urban Development, and the Director
of the Federal Housing Finance Agency shall
jointly issue regulations to exempt qualified
residential mortgages from the risk retention
requirements of this subsection.
(B) Qualified residential mortgage.--The
Federal banking agencies, the Commission, the
Secretary of Housing and Urban Development, and
the Director of the Federal Housing Finance
Agency shall jointly define the term
``qualified residential mortgage'' for purposes
of this subsection, taking into consideration
underwriting and product features that
historical loan performance data indicate
result in a lower risk of default, such as--
(i) documentation and verification of
the financial resources relied upon to
qualify the mortgagor;
(ii) standards with respect to--
(I) the residual income of
the mortgagor after all monthly
obligations;
(II) the ratio of the housing
payments of the mortgagor to
the monthly income of the
mortgagor;
(III) the ratio of total
monthly installment payments of
the mortgagor to the income of
the mortgagor;
(iii) mitigating the potential for
payment shock on adjustable rate
mortgages through product features and
underwriting standards;
(iv) mortgage guarantee insurance or
other types of insurance or credit
enhancement obtained at the time of
origination, to the extent such
insurance or credit enhancement reduces
the risk of default; and
(v) prohibiting or restricting the
use of balloon payments, negative
amortization, prepayment penalties,
interest-only payments, and other
features that have been demonstrated to
exhibit a higher risk of borrower
default.
(C) Limitation on definition.--The Federal
banking agencies, the Commission, the Secretary
of Housing and Urban Development, and the
Director of the Federal Housing Finance Agency
in defining the term ``qualified residential
mortgage'', as required by subparagraph (B),
shall define that term to be no broader than
the definition ``qualified mortgage'' as the
term is defined under section 129C(c)(2) of the
Truth in Lending Act, as amended by the
Consumer Financial Protection Act of 2010, and
regulations adopted thereunder.
(5) Condition for qualified residential mortgage
exemption.--The regulations issued under paragraph (4)
shall provide that an asset-backed security that is
collateralized by tranches of other asset-backed
securities shall not be exempt from the risk retention
requirements of this subsection.
(6) Exemption for certain commercial real estate
loans.--
(A) Exemption for single loan commercial real
estate securitization.--A securitization of a
single commercial real estate loan or a group
of cross-collateralized or cross-defaulted
commercial real estate loans that represent the
obligation of one or more related borrowers
secured by one or more commercial properties
under direct or indirect common ownership or
control is exempt from the risk retention
requirements of this section.
(B) Exemption for qualified commercial real
estate loans.--
(i) Regulations required.--The
Federal banking agencies and the
Commission shall jointly maintain
regulations to exempt qualified
commercial real estate loans from the
risk retention requirements of this
section.
(ii) Standards for regulations.--The
regulations issued under clause (i)
shall--
(I) include the requirements
under which interest-only loans
may be exempt from the risk
retention requirements of this
section;
(II) not impose any term
requirements on the length of a
qualified commercial real
estate loan;
(III) if an amortization
requirement is included, not
impose an amortization schedule
of less than 30 years; and
(IV) not impose separate
loan-to-value ratio caps on
qualified commercial real
estate loans that are
documented with appraisals that
utilize lower capitalization
rates than other loans.
[(6)] (7) Certification.--The Commission shall
require an issuer to certify, for each issuance of an
asset-backed security collateralized exclusively by
qualified residential mortgages, that the issuer has
evaluated the effectiveness of the internal supervisory
controls of the issuer with respect to the process for
ensuring that all assets that collateralize the asset-
backed security are qualified residential mortgages.
(f) Enforcement.--The regulations issued under this section
shall be enforced by--
(1) the appropriate Federal banking agency, with
respect to any securitizer that is an insured
depository institution; and
(2) the Commission, with respect to any securitizer
that is not an insured depository institution.
(g) Authority of Commission.--The authority of the Commission
under this section shall be in addition to the authority of the
Commission to otherwise enforce the securities laws.
(h) Authority to Coordinate on Rulemaking.--The Chairperson
of the Financial Stability Oversight Council shall coordinate
all joint rulemaking required under this section.
(i) Effective Date of Regulations.--The regulations issued
under this section shall become effective--
(1) with respect to securitizers and originators of
asset-backed securities backed by residential
mortgages, 1 year after the date on which final rules
under this section are published in the Federal
Register; and
(2) with respect to securitizers and originators of
all other classes of asset-backed securities, 2 years
after the date on which final rules under this section
are published in the Federal Register.
* * * * * * *
MINORITY VIEWS
H.R. 4620, the ``Preserving Access to CRE Capital Act of
2016,'' would weaken the risk retention rules promulgated under
the Dodd-Frank Wall Street Reform and Consumer Protection Act
as they apply to the Commercial Mortgage Backed Securities
(CMBS) market. This bill is yet another piece of legislation
that deliberately ignores the financial crisis of 2008, the
failure of the securitization model during that crisis, the
broad devastation the crisis and the residential mortgage-
backed securities (RMBS) market brought to our economy and the
millions of Americans who lost their homes. While most
attention and blame for the crisis fell on the actions in the
RMBS market, Democrats recall that concerns about the credit
quality of Lehman Brothers' commercial real estate loan
warehouse directly led to Lehman's bankruptcy, which
precipitated the complete shutdown of our credit markets in
September of 2008.
Democrats understand that the financial crisis did not only
expose the weaknesses of the RMBS model, but the entire process
of securitization. For example, economists at the Federal
Reserve Bank of New York found that ``investors'' aversion to .
. . CMBS . . . increased steadily from 2007 and reached
staggering proportions in late 2008. It reflected anxiety over
a possible rapid increase in commercial mortgage loan defaults
driven by the decline in credit standards and high leverage of
many properties in CMBS loan pools as well as the potential for
a severe economic downturn.'' Not surprisingly, new issuances
of CMBS, as with private RMBS, all but disappeared between 2008
and 2009 as investors fled this market. Investors had learned
that the underlying commercial mortgages were poorly
underwritten, with excessive leverage and unrealistic
appraisals.
In passing financial reform, Congress recognized that every
asset-backed security, including CMBS, can fall into the trap
of ``originate-to-distribute,'' whereby a lender makes a loan
without regard to whether the borrower can repay because the
loan can be packaged up into a security and sold to
unsuspecting investors who bear all the risk. Congress
realigned the market incentives by requiring either the lender
or the securitizer of all types of assets, including credit
cards, commercial loans, auto loans, residential mortgages and
commercial mortgages, to have ``skin in the game,'' by
retaining five percent of the credit risk of the security. By
retaining this slice of the risk, the securitizer becomes more
concerned with the quality of the underlying loans because its
money is also at stake.
Dodd-Frank also recognized that if a security was backed by
only the most pristine loans, there was no need to require
``skin in the game;'' however, H.R. 4620 undermines this gold
standard by expanding the exemption to interest only loans,
removing term requirements, lengthening amortization
requirements and removing restrictions designed to limit the
industry's use of unrealistic appraisals. The bill would also
create a loophole from the rules by exempting CMBS comprised of
one or more loans to a single business. When crafting the risk
retention rule, the financial regulators considered and
rejected each of the proposals included in H.R. 4620 because,
after evaluating extensive public comment, they determined that
they are not in the public interest. And to be clear,
securitizers can still package up the loans that fail to meet
the gold standard, but because of the loans' heightened risk,
they must retain a portion of the credit risk.
Democrats worked in a bipartisan fashion to put in place
key reforms to not only prevent a repeat of the 2008 financial
crisis, but to also eliminate flawed incentives throughout the
financial markets to prevent future crises. H.R. 4620 would
undo some of these reforms, and for these reasons, Democrats
oppose it.
Maxine Waters.
Keith Ellison.
Ruben Hinojosa.
[all]